CORPORATE STRATEGY AND
FOREIGN DIRECT INVESTMENT
The process of Oversees Expansion
Theory of Multinational Corporation
The Strategy of Multinational Enterprise
Designing a Global Expansion Strategy
Multinational Corporations
• Innovation-Based Multinationals
– 3M (USA), N.V. Phillips (Netherlands), Sony (Japan)
• Mature Multinationals
– Coca-Cola, McDonald’s, Nestle, Procter & Gamble
• Senescent Multinationals
– Crown Cork & Steal
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Important Factors
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Cost Reduction
Economies of Scale (world-scale)
Multiple Sourcing
Knowledge Seeking
Keeping Domestic Customers
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Strategy Design
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Awareness of Profitable Investments
Selecting a Mode of Entry
Auditing the Effectiveness of Entry Mode
Using Appropriate Evaluation Criteria
Estimating the longevity of a competitive
advantage
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Example: Phillips
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Q&A
Q: What's the big trend in Asia?
A: Thirty-five years ago, companies thought of Asia as a
place to sell things manufactured in Europe. The next
phase was when manufacturing moved from Europe to
Asia. The phase [after that], in the last five years, was the
transfer of competencies from Europe and the U.S. into
Asia. That happened to Taiwan, Japan, Korea, and
Singapore. The shift now is that Philips is moving into
China with competencies, product-creation processes,
and development of new technologies.
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Q&A
Q: How important is China to Philips?
A: China will be the leading part of our Asia
strategy. That's why we moved from Singapore to
Hong Kong -- to be close to the driving force of
the electronics industry, which will be Northeast
Asia. And we believe that Greater China will be
the leader over time. The origins of initiatives in
the electronics sector will largely come out of
China.
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Q&A
Q: What sort of R&D work is Philips doing in China?
A: The continuous discussion is what kind of technology we
want to develop. If you look at TV, the transfer has been
from Europe, 10 years back, to Singapore. Now Singapore
is transferring TV development to Suzhou [near Shanghai].
Basic research is in the Shanghai area. The global audio
division headquarters, which was in Hong Kong, is moving
to Shenzhen [across the border from Hong Kong]. The
LCD division for cell phones was headquartered in Hong
Kong and has moved to Shanghai. We have no choice, we
must move [there] more and more.
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Q&A
• Q: Why?
• A: There's a tremendous pool of welltrained people in China, and that's where the
market is available.
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Q&A
Q: Philips has had its share of difficulties in China,
especially when it comes to getting Chinese
manufacturers of DVD players to pay royalties to
Philips and other companies that control the
intellectual-property rights. Are things getting better?
A: Philips had a lot of problems with the Chinese government
over royalties. But those differences have been resolved.
From a historic perspective on intellectual property [IP],
they didn't understand the need to respect IP and pay for IP.
With [Beijing's entry into] the WTO, this has been solved.
The [agreement with the government over DVD royalties]
has been the first real breakthrough showing that there's
an understanding of IP in China.
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Q&A
Q: How do you see other Asian countries
competing against China?
A: Taiwan is trying to achieve a fast change into a
knowledge economy, which is the only way they
can go. That's the same thing that Singapore is
doing, that Japan is doing, that Korea will be
doing. But the fact of life is that China is doing the
same thing as well.
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Q&A
Q: In that case, what's the Philips division of labor for
Asian R&D?
A: Our biggest [Asian center] is in Singapore. We have a
major operation in Bangalore, [India,] which is a major
part of Philips' software development. We have a big unit
in Taiwan for semiconductors and components. And there's
a new one in Shanghai, which started three or four years
ago, doing basic research. Shanghai also is for product
research: consumer electronics, a little bit of lighting.
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Q&A
Q: What's the impact on your R&D operations elsewhere?
A: We are refocusing our number of development spots in the
world, and Asia is the growing part of those activities. We
used to have, in Europe, God knows how many places.
Those days are over. We are centralizing development
activities into competence centers: Bangalore for
software, Singapore for consumer electronics, Taiwan for
semiconductors and components -- and Shanghai for all of
them.
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Entry Modes
Joint
Ventures
Exporting
Licensing
Turnkey
Projects
Franchising
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Wholly Owned
Subsidiaries
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EXPORTING
Advantages:
Disadvantages:
 High transportation costs
 Avoiding substantial set-up
costs in a host country
 Trade barriers
 Immediate profits
 Problems with local
marketing agents
 Achieving experience curve
and location economies
 Inability to realize full sales
potential of the product
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TURNKEY PROJECTS
A project in which a firm agrees to set up
an operating plant for foreign client and
hand over the “key” when the plant is fully
operational
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TURNKEY PROJECTS
Advantages:
Disadvantages:
 Ability to earn returns from
process technology skills in
countries where FDI is
restricted

Creating efficient
competitors

Selling the technology =
selling competitive advantage
 Less risky than conventional

FDI
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Lack of long-term market
presence
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LICENSING
Agreements where licensor grants the rights
to intangible property to another entity for
a specific period, and in return, the
licensor receives royalty fee from licensee.
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LICENSING
Advantages:
Disadvantages:
 Reduces development costs and
risks of establishing foreign
enterprise
 Lack capital for venture
 Unfamiliar or politically volatile
market
 Lack of control
 Inability to involve into
global strategic coordination
 Cross-border licensing may
 Overcomes restrictive investment
be difficult
barriers
 Others can develop business
applications of intangible property  Creating a competitor
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FRANCHISING
A specialized for of licensing in which the
franchiser not only sells intangible
property to the franchisee (normally a
trademark), but also insists that franchisee
agrees to abide by strict rules as to how it
does the business.
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FRANCHISING
Advantages:
 Reduces costs and risk of
establishing enterprise
 Ability to build global
presence quickly
Disadvantages:
 May prohibit movement
of profits from one
country to support
operations in another
country
 Quality control
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JOINT VENTURE
A joint venture entails establishing a firm
that is jointly owned by two or more
otherwise independent firms
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JOINT VENTURE
Advantages:
Disadvantages:
 Access to local partners
knowledge
 Risk giving control of
technology to partner
 Sharing development costs
and risks
 Absence of tight control
 Politically acceptable
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 Shared ownership can
lead to conflict
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WHOLLY OWNED SUBSIDIARY
Advantages:
 Protection of technology
Disadvantages:
 High costs and risks
 Ability to engage into global
strategic coordination
 Ability to realize location and
experience economies
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SELECTING AN ENTRY MODE
 Technological Know-How:
 Wholly owned subsidiary, except:
1. Venture is structured to reduce risk of loss of technology
2. Technology advantage is transitory
 Then licensing or joint venture OK
 Management Know-How:
 Franchising, subsidiaries (wholly owned or joint venture)
 Pressure for Cost Reduction:
 Combination of exporting and wholly owned subsidiary
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Theories of the Multinational
Corporation
 Market Imperfections
 Theory of Industrial Organization
 Internalization Theory
 Financial Market Imperfections
 Strategic Behavior Theory (F.T. Knickerboker)
 The Product Life Cycle Theory (R. Vernon)
 Location-Specific Advantages Theory (J.Dunning)
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